External shocks and fiscal deficits in a monetary model of international reserve determination: Honduras, 1960-83

Abstract

Results from single-equation estimation of a standard monetary model suggest that central bank credit growth in excess of growth of money demand was the main source of international reserve losses in Honduras during the 1960-83 period. Further 3-SLS estimates suggest that increases in central bank credit growth were largely in response to rising external interest rates and decreases in the income terms of trade. In addition, income growth - hence growth of money demand - shows a strong positive response to the income terms of trade. The fiscal deficit is found to have an insignificant impact on central bank credit growth.